Borrowers, Should You Be Ready for Fed's First Interest Rate Hike?

Even Wall Street’s closest followers of the Federal Reserve’s policy makers are not exactly sure when the first short-term interest rate hike will come, but consensus has unified on September, at the earliest.
April’s just-released strong jobs report has boosted the chances of higher rates later this year. The majority of economists at top Wall Street banks polled by Reuters on Friday are holding the line on a projected September rate hike.

The Reuters poll found good consensus that the federal funds rate will shift from “near zero” — where it’s been since late 2008 — to 0.625 percent at year’s end, and possibly between 1.25 to 2.25 at the end of 2016.
Any increase in the federal funds rate — the rate that banks charge each other for overnight loans to meet reserve balances required by the Fed — will have an impact on financial products held by consumers, including mortgages and home equity lines of credit, car loans and credit card offers. Some could rise faster than others. Consumers holding loans based on variable rates are most vulnerable.
Average fixed mortgage rates have been near historical lows, off and on, since the financial crisis and Great Recession. Freddie Mac reported last week that the 30-year fixed was at 3.80 percent, climbing slowly.
The 30-year fixed rate set its all-time low in November 2012: 3.31 percent. That was the best year for purchasing a home if you had good credit and managed to ride out the financial crisis and Great Recession in relatively good shape. The 30-year fixed-rate mortgage averaged 3.66 percent for 2012, the lowest annual average in at least 65 years.
But those days are well in the past.
Financial experts agree that even with a short-term boost in the rates of various loan products, the rate an individual pays will still be largely based on his or her credit worthiness, or credit score. Under the widely used FICO model, that three-digit number can range from 300 to 850, the higher the better.
“Regardless of what the Fed does and what happens to rates in response to whatever the Fed does, the interest rate you’re going to be paying is still largely based on the quality of your credit,” John Ulzheimer, president of consumer education for CreditSesame.com, told CNBC.
Refinance Now, If You Can and If It’s Right for You
For borrowers holding mortgages with rates at least a point higher than the current average for the 30-year fixed rate, the time to seek refinancing is here — if you qualify and if it makes long-term financial sense for your household.
There are 600,000 mortgage borrowers right now who can qualify for the Home Affordable Refinance Program (HARP). The program was launched to help homeowners who are current on their mortgage payments, but who are underwater on their mortgages. This means they owe almost as much or more than the current value of their homes.
Many homeowners cannot refinance, even if they have good credit, because they homes are still “underwater,” meaning they owe more than the value of the property. Despite home prices that have surged in some areas even beyond pre-crisis levels, many borrowers are still waiting for an opportunity to refinance or sell. Despite a seller’s market in many U.S. regions, some homeowners are not selling for fear of not being able to afford to jump into another home.
Meanwhile, rental markets across the nation are becoming more expensive, making buying a home as or more affordable than renting.
“I don’t think you buy a house before you’re truly ready, just because rates are increasing,” Greg McBride, senior financial analyst for Bankrate.com, told CNBC.
The same applies to buying a car before you actually need one. “A full percentage-point rate increase adds maybe $12 a month to your auto payment,” he said. “Nobody is going to downsize from the sedan to the compact on the basis of $12 a month. You don’t need to rush that decision by any means.”

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